The present invention relates generally to a method and system for determining whether a check used as payment for goods and services will likely be paid. More particularly, the invention relates to a system and method for developing a database of checking account information from checks received for processing and for comparing a check presented to a merchant or financial institution against that database to determine whether or not the account is in good standing. The database is populated with information obtained by tracking checks that are negotiated by financial institutions to determine if they are paid or are returned unpaid. The invention allows a financial institution or other business accepting checks to make available data concerning any checking account from any financial institution for which it has attempted to negotiate payment.
Many businesses and consumers pay for goods and services with checks, and many businesses and merchants accept checks for payment. The use of checks provides a significant convenience by making it possible to purchase goods and services or pay bills without having to tender cash for each transaction. However, accepting checks exposes a business or merchant to the risk that the check will be bad, or “bounce”, and will not be honored by the payor's bank. This typically occurs in cases where the account on which the check was drawn has insufficient funds, or if the check is a forgery. In most cases where a check is bad, it may be difficult to collect payment from the payor or repossess goods purchased with the bad check.
In light of the potential exposure to losses associated with accepting checks, businesses have sought ways to accurately differentiate between good checks and bad checks. Accuracy is essential because businesses want to reject as many bad checks as possible and limit the number of good checks rejected. Generally, the decision to accept or reject a check must be made prior to completion of the transaction, and must be made quickly while the payor waits.
In order to provide businesses with greater levels of confidence regarding acceptance of checks presented by payors, several companies offer such businesses check verification or guarantee services. With check “verification”, a business relies on an authorization received from the check verification company (e.g., in the form of an authorization code) to decide whether to accept or reject the check. However, the business retains the risk of loss if the check turns out to be bad. In most cases, the business is charged a flat fee for each check verification.
With check “guarantee” companies, the company will actually purchase the check from the business if an approved check turns out to be bad. This ensures that the business will not suffer a loss if it accepts a check that has been approved by the check guarantee company. In most cases, the business is charged a discount fee equal to a percentage of the value of each guaranteed check.
These check acceptance (verification and guarantee) companies provide authorization codes in response to transaction data, such as the transit ABA number and account number for the check and the purchase amount, provided by the business. Typically, the acceptance companies will determine the authorization codes by searching a database for negative information, such as outstanding bad checks, associated with the checking account number or identification data (e.g., driver's license number). This data is received from various participating banks and is then analyzed to determine the probability that the current check will be bad.
Even with the prevalent use of check acceptance services, it is estimated that financial institutions and merchants incur losses from bad checks amounting to $13 billion dollars a year. This is largely attributable to the paucity of data available to the acceptance companies.
The ability of the check acceptance companies to collect checking account data is constrained by the number of banks and financial institutions that subscribe to their services and provide their account data as well as the ability of those banks and financial institutions to provide data concerning all of their accounts. For example, many businesses which supply data to acceptance companies limit the data on accounts that are not in good standing. Therefore, both financial institutions and businesses repeatedly incur losses from bad checks written on the same accounts.
In addition, today, there are no databases, of any significant size, that provide information about checking account holders including names and addresses along with bank account numbers. For example, a major printer of checks may attempt to build such a database, but it would require the consent of every bank for whom it prints checks, to use of its data and there is no capability for obtaining information about accounts that get their checks printed privately.
What is desired is a comprehensive database that can provide current information about the status of any checking account, before a business or merchant accepts a check as payment and before a financial institution negotiates the check. The database is generated by tracking checks received for processing, rather than by information received from the banks or financial institutions. Such a database would significantly reduce both financial institution and business losses from returned and unpaid checks.
The invention described herein outlines a methodology and a system construction for establishing a comprehensive database of checking accounts. The database contains records of checking accounts, at both financial institutions that contribute data and those that do not, that are known to be “in good standing” and those accounts that are either closed or designated “not in good standing”.